Banco de M´exico Documentos de Investigaci´on Banco de M´exico Working Papers N◦ 2013-04 Nurture vs. Nurture: Endogenous Parental and Peer Effects and the Transmission of Culture Daniel Vaughan Banco de M´exico April 2013 La serie de Documentos de Investigaci´ondel Banco de M´exicodivulga resultados preliminares de trabajos de investigaci´onecon´omicarealizados en el Banco de M´exicocon la finalidad de propiciar el intercambio y debate de ideas. El contenido de los Documentos de Investigaci´on,as´ıcomo las conclusiones que de ellos se derivan, son responsabilidad exclusiva de los autores y no reflejan necesariamente las del Banco de M´exico. The Working Papers series of Banco de M´exicodisseminates preliminary results of economic research conducted at Banco de M´exicoin order to promote the exchange and debate of ideas. The views and conclusions presented in the Working Papers are exclusively of the authors and do not necessarily reflect those of Banco de M´exico. Documento de Investigaci´on Working Paper 2013-04 2013-04 Nurture vs. Nurture: Endogenous Parental and Peer Effects and the Transmission of Culture* y Daniel Vaughan Banco de M´exico Abstract I propose a model of cultural transmission where children interact strategically with each other with the only desire to fit in, and parents purposefully socialize their children to their own culture. In the empirical section I estimate parental and peer effects using US teenager data on religious attitudes and alcohol consumption from the Add Health study. I find that, controlling for individual and school observables, children attitudes are a weighted average of their parents' and peers' attitudes, with the latter generally dominating. I then show that these are stable in time with now signs of fading away in the transition from adolescence to adulthood. Finally, the comparative statics allow me to separate endogenous from exogenous parental effects. Keywords: Cultural transmission, endogenous preferences, Add Health study, preference for conformity, endogenous socialization. JEL Classification: D19, J13, J15. Resumen Propongo un modelo de transmisi´oncultural en donde los ni~nosinteract´uanestrat´egicamente con el ´unicodeseo de pertenecer y en donde los padres desean socializar a los ni~nosa su propia cultura. En la parte emp´ıricaestimo los efectos de los padres y los amigos utilizando datos de actitudes religiosas y consumo de alcohol para adolescentes en Estados Unidos de la encuesta Add Health. Encuentro que, controlando por factores individuales y de la escuela, las actitudes de los adolescentes son un promedio ponderado de la de los padres y amigos, donde los amigos generalmente tiene una mayor ponderaci´on.Adicionalmente, estos efectos son estables en el tiempo y no parecen decaer en la transici´onde la adolescencia a ser adultos. Finalmente, la est´aticacomparativa permite separar efectos end´ogenosy ex´ogenos de los padres. Palabras Clave: Transmisi´oncultural, preferencias end´ogenas,estudio Add Health, deseo de conformidad, socializaci´onend´ogena. *I thank first and foremost Alberto Bisin for his continual guidance and support. I also thank Raquel Fern´andez,Boyan Jovanovic, Kevin Thom, David Cesarini and Chetan Dave. Finally the comments from two anonymous referees helped to improve the presentation of the paper. All errors are mine. y Direcci´onGeneral de Investigaci´onEcon´omica.Email: [email protected]. 1 Introduction Two topics that have been traditionally neglected by the economics profession have gained ascendance in recent years: first, it is now clear that the social environment— i.e. the quantity, quality and structure of interactions with other individuals— has important effects on our choice behavior.1 Second, researchers have consistently shown the long-lasting effects that childhood and early childhood interventions have on future economic outcomes.2 Drawing on a large number of findings in the developmental psychology literature, in this paper I propose a simple model that integrates both of these literatures. Theoretically, I take the social environment to consist of parental and peer strategic interactions. Childhood is defined as the stage where preferences are being formed, individuals are myopic and their only desire is to fit in, balancing the tradeoff between being like their parents and being like their peers.3 Adulthood is defined as the stage where individuals have well-defined preferences and are not susceptible to peer pressure.4 Knowing that their children’s social environment may affect their choices, parents purposefully socialize them to their own choice behavior.5 Due to the quadratic nature of the preferences assumed during the childhood stage, the equilibrium outcome of this set of strategic interactions between children, parents and children and parents yields first-order conditions that coincide with the standard linear-in-means regression used in the peer-effects literature, augmented by parental effects, i.e. the framework provides a simple microfoundation of the standard methodology used in this literature. With this socialization model in mind, my empirical objectives are threefold: first, using data from the Add Health longitudinal study on two religious variables (religious importance and frequency of praying) and frequency of alcohol consumption, I estimate parental and peer effects. Second, I argue that parental effects can be decomposed into exogenous and endogenous components, the former associated with a role-model effect, and the latter with endogenous parental socialization choices by the parents. Third, I argue that these effects are enduring in time, showing that parents and peers are indeed important in the transmission of cultural traits. 1The literature on peer and neighborhood effects is large. Recent reviews can be found in Blume, Brock, Durlauf, and Ioannides (2011) and Epple and Romano (2011) and other chapters in the Handbook of Social Eco- nomics. 2See for example Currie (2001) and Heckman (2006). 3Developmental psychologists have shown that the desire to conform is important in understanding children’s socialization processes and outcomes. See for example the references in Grusec and Davidov (2007, pp.297-298), Bukowski, Brendgen, and Vitaro (2007) and Rubin, Bukowski, and Parker (2006). 4Needless to say this extreme characterization of adulthood is a simplifying assumption. 5My treatment of socialization is standard and follows the general treatment in developmental psychology. For example, Maccoby (2007, pp.13) defines socialization as “processes whereby na¨ıve individuals are taught the skills, behavior patterns, values, and motivations needed for competent functioning in the culture in which the child is growing up.” Similarly, Grusec and Davidov (2007, pp.284) include in their definition “(...) the acceptance of values, standards, and customs of society as well as the ability to function in an adaptive way in the larger social context.” 1 Each component in the model serves a specific role to attain my main empirical objectives: while the children’s component of the model maps nicely to the growing econometric literature on peer effects, the parental socialization component generates testable predictions that allow me to disentangle endogenous and exogenous parental effects. To clarify the language from the outset, I take parental choices or outcomes to be exogenous with respect to the socialization pro- cess of their children, forbidding, for example, that they can credibly deviate from their optimal actions to set an example for their children. It is in this very specific sense that I say that parental choices have an exogenous role-model effect. Nonetheless, parents can endogenously socialize their children by affecting the relative weights they put on parental and peer conformity; this I call endogenous socialization.6 Empirically, I first find that contrary to what some developmental psychologists claim, peer effects generally dominate parental role-model effects.7 While this finding is not new in the economics literature on social interactions, the estimates for peer effects I present here are considerably larger than those generally found in the literature, a result that can be explained if children utility (loss) functions are separable, so that parental and peer effects are magnitudes relative to each other.8 Put differently, when parental and peer effects enter separably in a child’s utility function, one can only identify one effect relative to the other. For this reason I restricted the empirical analysis to outcomes where exactly the same question has been asked to children and parents in the Add Health data.9 Also in contrast to other findings in development psychology, exogenous parental effects are positive, even for the case of alcohol consumption where these are almost negligible.10 Moreover, using the comparative statics of the parental socialization problem, I show that the 6To the best of my knowledge the developmental psychology literature on socialization is mute on the veracity of this assumption— that parents cannot or do not deviate from their optimal choices to socialize their children— rather focusing more on the mechanisms of socialization. In their review of the literature, Grusec and Davidov (2007) emphasize that one dimension of socialization involves behavioral and psychological control that includes rule-setting and monitoring, as well as “the use of guilt-inducing strategies, withdrawal of love, and parental intrusiveness.” This type of socialization strategy corresponds to the class of endogenous